This week from CEPR: March 26

Thursday, March 26, 2020

Highlights from some of the latest research reports published in the Centre for Economic Policy Research (CEPR) network’s long-running series of discussion papers, as well as some other recent CEPR publications.

Also, links to some of the latest columns on Vox, the Centre’s policy portal, which provides ‘research-based policy analysis and commentary from leading economists’.

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    • New Discussion Papers


    Christian Bayer, Moritz Kuhn       
    CEPR DP No. 14519  | 12 March 2020 

    There are large differences in case fatality rates from the coronavirus outbreak across countries, considerably higher in Italy than in some northern European countries. A new CEPR study by Christian Bayer and Moritz Kuhn uses World Value Survey data on the share of people aged 30-49 who live with their parents to show that fatality rates are initially higher in countries with more intergenerational interactions. The study provides a warning for how important it is for countries where the elderly and the young live close together in particular to try to contain the virus early on. Among the findings: 

    • During the early phase of the pandemic, outcomes in terms of case-fatality rates (CFR) have differed widely across countries.
    • There is a strong positive correlation between countries' CFRs and the share of working-age families living with their parents.
    • Italy takes on extreme values in both dimensions of social interactions across generations and in the current CFR estimate.
    • Within the European Union, the countries considered high-risk are Poland, Bulgaria, Croatia and Slovenia. 

    Figure 2: Case-fatality rates and share of working-age population living with parents across countries


    Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt        
    CEPR DP No. 14520 |  21 March 2020

    By reducing economic interactions among people, containment policies exacerbate the recession but raise welfare by reducing the death toll caused by the epidemic. A new CEPR study finds that it is optimal to introduce large-scale containment measures that result in a sharp, sustained drop in aggregate output. This optimal containment policy is estimated to save roughly half a million lives in the United States. 

    These are the findings of a new CEPR study by Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt, who study the interaction between economic decisions and epidemics, and highlight the basic economic forces at work during an epidemic. The results imply that people's decisions to cut back on consumption and work reduce the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalise the effects of their economic decisions on the spread of the virus.


    Stefano Ramelli, Alexander F Wagner       
    CEPR DP No. 14511 | 19 March 2020

    Analysis of stock price reactions to COVID-19 suggests that the market initially responded in a relatively orderly fashion by weighing the economic consequences of the evolving outbreak, before the ‘fever’ period of late February, when investors started to become concerned about high corporate debt and liquidity, and about the survival chances of firms with little cash. 

    • The telecoms and healthcare industries did relatively well, while transport and energy plummeted. 
    • Within industries, US firms reliant on Chinese inputs and those with a strong export orientation towards China suffered. 
    • Sophisticated investors appear to have started pricing-in the effects of the virus in the first part of January (the ‘Incubation’ phase), that is, before managers or analysts started paying attention.
    • The ‘outbreak’ phase followed, during which China-oriented stocks and internationally oriented stocks more generally strongly underperformed. 
    • In the last week of February and early March (the ‘fever’ phase), the aggregate market first fell strongly and then entered a whipsaw pattern. 

    These results illustrate how the health crisis morphed into a possible financial crisis, presumably also because of pre-existing fragilities in the financial markets. Broad policy actions will be required to avoid further negative outcomes and propagations of the shock. Investors may expect the real shocks caused by the outbreak of COVID-19 to be amplified by financial channels, in light of pre-existing fragilities and stress in the financial markets.

    Figure 2: Feverish Stock Price Reactions to COVID-19

    ​​​NoteThe sample consists of 3000 Russell companies with available data and more that US$ five million of equity market capitalisation. 


    Agnès Bénassy-Quéré, Arnoud Boot, Antonio Fatás, Marcel Fratzscher, Clemens Fuest, Francesco Giavazzi, Ramon Marimon, Philippe Martin, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker, Pedro Teles, Beatrice Weder di Mauro | 21 March 2020

    Writing at Vox, a group of CEPR researchers propose a Covid credit line in the European Stability Mechanism, with allocation across member states proportionate to the severity of the public health and economic challenges encountered. While it would involve some coordination and solidarity among member states, the dedicated credit line would reduce risks to economic and financial stability for a while, allowing members to sustain their efforts by making their borrowing costs less dependent on individual fiscal situations.

    THE SUPPLY SIDE MATTERS: Guns versus butter, COVID-style

    Richard Baldwin | 22 March 2020

    ‘Go big. Act fast. Keep the lights on’ is good advice for governments trying to flatten the epidemiological and recession curves simultaneously. Richard Baldwin, founder of VoxEU, argues that the combination of containment policies that dampen production and stimulus policies that maintain spending will generate supply-side problems. Cost-push inflation may return, political pressures for price controls and rationing may be irresistible, and governments may find themselves engaged in thinking about production and logistics of the type not undertaken since the 1940s


    Robert Barro, Jose Ursua, Joanna Weng  | 20 March 2020

    What is a plausible worst-case scenario for outcomes under COVID-19? Writing at Vox, Robert Barro and colleagues draw lessons from the 1918-1920 Great Influenza Pandemic using data from 43 countries. The results show flu-related deaths reached 39 million, 2% of the world’s population, implying 150 million deaths when applied to the current population. Controlling for effects from the First World War, GDP and consumption in the typical country declined by 6% and 8%, respectively, while real returns on stocks and short-term government bills fell meaningfully.

    The authors conclude that while large potential losses in lives and economic activity justify current policy actions to limit the damage, there is a difficult trade-off between mortality and lost output, and this trade-off warrants discussion that is absent so far.

    THE CASE FOR COVID PERPETUAL EUROBONDS: Jointly guaranteed and supported by the European Central Bank

    Francesco Giavazzi, Guido Tabellini | 24 March 2020

    How should the large fiscal support required to combat the COVID pandemic be financed? Writing at Vox, Francesco Giavazzi and Guido Tabellini argue the cost should be distributed over several generations. This can be achieved by issuing irredeemable or very long maturity Eurobonds, backed by the ECB to keep the financing burden low. 

    The authors argue that no institutional or legal constraints prevent this policy response. Prompt action is critical since allowing one crisis to morph into many could disrupt the European project, with far-reaching and unpredictable political implications. 

    HELICOPTER MONEY: The time is now

    Jordi Galí  | 17 March 2020

    The time has come for ‘helicopter money’ – direct, unrepayable funding by the central bank of the additional fiscal transfers deemed necessary. Rather than raising taxes and/or increasing government debt to finance the necessary fiscal programmes needed to address the COVID crisis. 

    THE COVID-19 BAZOOKA FOR JOBS IN EUROPE: A €500 billion package to stabilise the European economy

    Luis Garicano | 20 March 2020


    Europe needs a €500 billion ‘bazooka’ package to fight the virus, stabilise the European economy, and protect its jobs while the economy is in the ‘freezer’. Writing at Vox, Luis Garicano, argues that to prevent the European economy from stalling, we must preserve the links on which it is based. The current situation is particularly risky for euro area countries, which could face renewed flight to safety and doubts about the sustainability of the commitment to the euro in the face of a massive growth in debt levels (redenomination risk). The funding plans he proposes are based on legislative proposals that already exist but have not yet been developed. Luis Garicano argues that it is now time to finish implementing them. 

    This column first appeared in the Vox eBook Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, available to download free here.

    THE CASE FOR A COORDINATED COVID-19 RESPONSE: No country is an island

    Claudia Biancotti, Alessandro Borin, Federico Cingano, Pietro Tommasino, Giovanni Veronese  | 18 March 2020

    Writing at Vox, members of the Bank of Italy’s COVID-19 monitoring group, argue that in the in absence of coordinated containment measures to combat the spread of COVID-19, the most likely outcome is the worst of both worlds: preventable loss of lives and of GDP. Predictability and consistency in policy responses across space and time is key, both in the public health and economic domains. Effective cooperation in avoiding a 'common bad' might be able to endow the world with the crucial common good of a more complete and effective governance. The European Union should be the first to set an example.

    CORPORATE DEBT BURDENS THREATEN ECONOMIC RECOVERY AFTER COVID-19: Planning for debt restructuring should start now

    Bo Becker, Ulrich Hege, Pierre Mella-Barral | 21 March 2020

    Countries are implementing ambitious packages to support households and businesses during the COVID pandemic. In light of already elevated corporate debt burdens, provisions for future debt restructuring should be made as soon as possible. These include carefully designed bailout packages, speedier in-court insolvency proceedings, and a stronger role of the state in dealing with renegotiations. Failure to plan and prepare for these cases could lead to a much slower economic recovery.

    These are the conclusions of Bo Becker and colleagues on how to manage the looming corporate debt strains and keep the likely precarious situation of sovereign finances under control. 


    Steven Hamilton, Stan Veuger  | 21 March 2020

    A study by Steven Hamilton and Stan Veuger explores the notion of using public spending to build a bridge for businesses during this unprecedented period. The EU needs to be open to a variety of new policy measures to meet the COVID challenge head on, perhaps even turning to Eurobonds to deal with lingering fiscal sustainability concerns going forward.   

    CORONAVIRUS: The impact on stock prices and growth expectations

    Niels Joachim Gormsen, Ralph Koijen | 23 March 2020

    Writing at Vox, Niels Joachim Gormsen and Ralph Koijen use high-frequency data on dividend futures to evaluate the impact on economic growth expectations of the coronavirus. The study finds that dividend growth and GDP growth expectations in the United States and the European Union began to deteriorate after the lockdown in Italy, and these effects were exacerbated by the travel restrictions imposed thereafter. The lower bound on dividend growth is as severe as during the Global Crisis, at least in the short run.

    PANDEMICS AND SOCIAL CAPITAL: From the Spanish flu of 1918-19 to COVID-19

    Arnstein Aassve, Guido Alfani, Francesco Gandolfi, Marco Le Moglie | 22 March 2020

    Social disruption in the aftermath of the 1918 Spanish flu pandemic led to a long-term deterioration in social trust, which had important economic consequences. A weak initial response to the COVID crisis may lead to deterioration in social trust and consequently longer-run economic costs.

    These are the findings of a study by Guido Alfani and colleagues, who use a representative survey of the population of the United States in the aftermath of the Spanish flu to evaluate the permanent consequences of the pandemic on individual behaviour, and show that long-term effects of a pandemic go well beyond the demographic losses. 

    SICKENING THY NEIGHBOUR: Export restraints on medical supplies during a pandemic

    Simon Evenett | 19 March 2020

    Given the centrality of China to many international supply chains, there is considerable interest in the impact of COVID-19 on global trade flows – and a troubling trade policy dimension is now coming to light. Writing at Vox, Simon Evenett assesses Global Trade Alert findings that 24 nations have recently imposed export restrictions on medical supplies.

    Proposals for export limits should be tested against alternatives that do not impede foreign purchases. Governments concerned that subsidising domestic production will disproportionately benefit foreign buyers should consider setting price floors for medical devices sold to the state. Such minimum prices could apply to a pre-announced limit of government purchases. Local producers would then be assured of a guaranteed amount of revenue for supplying the state with critical medical supplies.


    Christian Bayer, Moritz Kuhn | 20 March 2020

    There are large differences in case fatality rates from the coronavirus outbreak across countries, from around 6% in Italy to close to zero in some northern European countries. Writing at Vox, Christian Bayer and Moritz Kuhn use World Value Survey data on the share of people aged 30-49 who live with their parents to show that fatality rates are initially higher in countries with more intergenerational interactions. The study shows that the structure of social interactions matters for fatality rates in the COVID outbreak and provides a warning for how important it is for countries where the elderly and the young live close together in particular to try to contain the virus early on. 


    Viral Acharya, Sascha Steffen | 22 March 2020

    Stock prices have declined and credit market conditions have tightened in response to the COVID-19 pandemic. Writing at Vox, Viral Acharya and Sascha Steffen use two ‘stress tests’ to demonstrate that the quantum of credit commitments likely to move onto banks’ balance sheets should be manageable thanks to the healthier capitalisation of banks relative to before the Global Crisis. 

    The authors show that in a severely adverse scenario, the average Tier 1 capital to risk-weighted assets ratio of banks is likely to move closer to the regulatory minimum of 8% and well below for some banks. Regulators should plan in advance for such a severe stress test by ensuring that banks prevent any further capital depletion through dividend payouts or share buybacks.


    Mathias Dewatripont, Michel Goldman, Eric Muraille, Jean-Philippe Platteau | 23 March 2020

    A combination of two currently available tests could identify people who are both free from COVID-19 and immune to it, and thus are safe to go back to work. Writing at Vox, Mathis Dewatripont and colleagues advocate a targeted scaling-up of procedures for both tests to help maintain vital services and accelerate the relaunch of the economy, while minimising the risk of the epidemic recurring after restrictions are lifted. 

    ANTICIPATING THE FINANCIAL CRISIS: Evidence from insider trading in banks

    Ozlem Akin, José M. Marín, José-Luis Peydró  | 18 March 2020

    A study by Ozlem Akin and colleagues presents evidence that many top executives of US banks sold their own shares in the build-up to the Global Crisis in 2008. Bankers acted in their own self-interest (by selling shares), but did not do anything in the bank’s interest (by not reducing bank exposure to real estate). This trend appears to be stronger for banks with higher real estate exposure, and weaker for independent directors or middle officers. Although the top bankers in riskier banks sold more shares, thus furthering their own interests, they did not reduce bank risk exposure.

    FIRMS’ ADOPTION OF DIGITAL TECHNOLOGIES: Slower in Europe than in the US

    Debora Revoltella, Désirée Rückert, Christoph Weiss | 18 March 2020

    European firms lag behind the United States in investment in research and development and the adoption of digital technologies. Using firm-level data from 2019, a study by European Investment Bank (EIB) economists finds that larger firms have higher rates of digital adoption than their smaller peers, and that digital firms have better management practices and show more dynamism. 

    The authors conclude that European policy-makers looking to close the innovation gap should address structural barriers to investment in digitalisation, remove disincentives to grow, and reduce market fragmentation, particularly in the services sector.


    Thiemo Fetzer, Lukas Hensel, Johannes Hermle, Chris Roth | 21 March 2020

    Will anxiety about the coronavirus crisis fuel a long-term economic downturn? Writing at Vox, Thiemo Fetzer and colleagues use Google search activity and individual survey data to document a rapid increase in economic anxiety in the United States in response to the initial global spreading of the virus. Survey respondents tend to overestimate the mortality and contagiousness of COVID-19, but underestimate the non-linear nature of how infectious diseases spread. The study suggests that information and public education may play a central role in containment and in managing the negative economic impact of increased economic anxiety.


    Beatrice Weder di Mauro   

    How can euro area countries work together to protect their economies? A diverse group of economists has suggested the creation of an emergency Covid credit line. CEPR President Beatrice Weder di Mauro tells Tim Phillips how it would work.


    Enrico Perotti    

    Enrico Perotti tells Tim Phillips that while regulatory reform means that banks are unlikely to be at risk, the same is not true for the shadow banking sector. Does this threaten financial stability, and what should policymakers do about it?